Sub-section (4) to section 90 has been inserted by the Finance Act, 2012 w.e.f. 01.04.2013 wherein a non-resident assessee who claims any relief under Double Taxation Avoidance Agreement [DTAA] is required to obtain a Tax Residency Certificate [TRC] from the Government of that country of which he is resident.
Section 195 of the Income tax Act, 1961 makes it obligatory on the part any person who is required to pay to non-resident any sum which is chargeable under the provisions of this Act to deduct income tax thereon at the rates in force.
Chargeability of Income tax is governed by the provisions of section 4 of the Income tax Act, 1961.
As per Section 4 of the Income tax Act, 1961, the income tax shall be charged for any assessment year in respect of the total income of the previous year of any person.
Section 5 of the Income tax Act, 1961 deals with the scope of total income of any previous year of a person.
As per sub-section (2) of section 5 in case of non-residents the total income includes all income from whatever source derived which –
(a) Is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) Accrues or arises or is deemed to accrue or arises in India during such year
Section 7 of the Income tax Act, 1961 deals with the Income deemed to be received in India and Section 9 deals with the Income deemed to accrue or arise in India.
As per section 7 of the Income tax Act, 1961
The following incomes shall be deemed to be received in the previous year :—
(i) the annual accretion in the previous year to the balance at the credit of an employee participating in a recognised provident fund, to the extent provided in rule 6 of Part A of the Fourth Schedule ;
(ii) the transferred balance in a recognised provident fund, to the extent provided in sub-rule (4) of rule 11 of Part A of the Fourth Schedule ;
(iii) the contribution made, by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD.
As per section 9 of the Income tax Act, 1961 the following income shall be deemed to be earned in India –
(i) All incomes accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India or through the transfer of a capital asset situate in India;
As per explanation 2 of section 9(1)(i) business connection generally includes dependent agent in India who acts on behalf of non-resident
Property can be movable or immovable, tangible or intangible. Intangible property may cover “any asset or source of income”
(ii) Salary income if it is earned in India;
(iii) Salary income payable by Central Govt to citizen of India for service outside India;
(iv) Dividend paid by an Indian company outside India;
(v) Interest, Royalty and fees for technical services paid by certain persons;
From the study of the provisions of law stated above Import of Machines is not covered under deeming provisions i.e. neither under section 7 nor under section 9 of the Income tax Act, 1961.
Import of Machine may be covered under section 5 of the Income tax Act, 1961 if the profits on sale of machines are received, accrued or arouse in India. As a general rule, in case of sale of goods, profits arise at the place where the contract of sale are made or sales are effected [66 ITR 159 (SC), 21 ITR 375, 31 ITR 760, 135 ITR 762]. Further, a contract is said to be made at a place where the offer is accepted [28 ITR 184 (SC), 18 ITR 333].
1. ABC Ltd, an Indian Company resident in India enters into an agreement for import of machine with XYZ LLC a US based company and which is resident of USA. As per the agreement ABC Ltd. gives offer for purchase of machinery by signing the agreement in India and which is accepted by XYZ LLC by signing the agreement at USA. In such a case since the offer is accepted at USA the contract is said to be made at USA and accordingly the profits will arise in USA. Hence not chargeable to tax in India;
2. In the above illustration if the offer for purchase of machinery is accepted by XYZ LLC when one of its directors visited in India and signed the agreement in India then the contract would be said to be made in India. In such a case the profit will arise in India and hence chargeable to tax in India;
3. Further, in case of illustration 1 above if the sale is effected in India i.e. ownership in goods is transferred in India then also profit will arise in India and hence chargeable to tax in India
Now in case if the profits on import of machine arise in India and chargeable to tax in India then as per Section 195 tax is required to be deducted at source in India. However, in case if the non-resident is a resident of that country with which India has DTAA and mostly under DTAA business profits are taxable in the country of which it is resident then in that case no tax is required to be deducted at source. However, in such a case for giving benefit of DTAA, non-resident is required to give TRC issued by the Govt of that country.
Author – CA Praveen Mittal, General Manager, Tax, India Today Group
Also Read: Residential Status & scope of total Income
(Republished With Amendments)